Presumably, the most common terms you will hear in real estate investment and financing is CAP RATE, you hardly hear a lot in other types of investment. It is a very simple and basic concept. A cap rate in full terms is a capitalization rate, which means, the net operating income of a property. What the property generates after expenses divided by the value or the estimated value of that property.
For example, if the building can generate a net operating income of N7 million and has a value of N100 million, 7/100 = 7% Cap rate.
Why is the cap rate used? it is used as an indicator of yield or return of income per Naira spent, if I have a 5% Cap I am only getting N5 per N100 invested.
In other industries, you will hear the price earning ratio, that is the price or the value divided by the income (price relative to earnings). If you look at it, that is just the reverse or the inverse of a cap rate. That means, PRICE EARNING is Value divided by income but in real estate CAP RATE is income divided by the value.
Cap rate is used to give people a sense of where the market is at or what the property is should be sold for. Cap rate alone does not give you the full data you need before you invest, you need to consider the risk and the growth rate. Some districts in Abuja, have a higher cap rate but poor growth while others have a low cap rate with higher growth potentials and earnings.